It spins out of it Howard. Under the 2003 EU Court of Justice ruling it appears that museums are not allowed to give preferential treatment for any category of citizens, whether it be age, nationality or location, such treatment has been deemed to be discriminatory. The case that started this all was an Italian case based on free entry for Italian pensioners, and it was determined that the Italian authorities were acting unlawfully by endorsing this. Similarly, by giving free entry to Dover residents, DDC could be perceived as giving preferential treatment to local residents which would be in breach of EU law.
It's very unfortunate, but it increasingly seems that DDC's hands were tied over this. They are not the first council to have come up against this - see the recent situation in Carlisle:
http://www.hexhamcourant.co.uk/carlisle-museum-s-free-entry-card-does-not-break-european-law-say-experts-1.782006?referrerPath=home/2.3307
It's looking increasingly that the £3.50 per annum entry fee was the best option DDC could take; otherwise there was a risk of breach of EU Law with resultant penalties.